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Mortgage Lending: Partying Like It's 2005

The return of no-doc lending.

We've heard some version of that quip over and over again. In years past, lenders happily fulfilled the dreams of eager borrowers, sight unseen. Income unseen. Assets unseen. Washington Mutual, now part of JPMorgan Chase(NYSE:JPM), promoted this view with a slogan: "The Power of Yes." The industry as a whole coined another clever term: NINJA loans, short for "no income, no job, no assets."

Without question, such mindless lending pushed the housing boom into crazy territory. In his recent book, CNBC's David Faber interviewed a mortgage lender who succinctly stated, "Fully documenting the borrowers' income could have stopped it [the crisis]. If I had said to you, the borrower, 'Fully document your income or you won't get this loan,' it would have ended."

Seems reasonable enough. And common sense tells you that banks, learning their lesson, would have buried such ridiculous lending standards six feet under.

You'd be wrong.

In an article discussing how Bank of America(NYSE:BAC) has been slow to get mortgage modifications up and running, TheWashington Post had some interesting tidbits (emphasis mine): "The company was also slow out of the box because it initially took a more conservative approach than some other banks, requiring that borrowers document their income and complete other paperwork before granting preliminary approval for a modification. In August, Bank of America softened the requirement and began authorizing some modifications without getting all the documents first."

Wonderful. One year after meltdown, we're back to the days when little things like, you know, facts, are beside the point. Don't have your paperwork? Can't prove you're a worthy borrower? Your name's Bernie Madoff? Don't worry about it. Take the money and run, dear homeowner. We'll worry about the consequences later, when someone else is in charge.

Why are such boneheaded moves prevailing? It's no secret: Most of the loans eligible for modification are already backed by Fannie Mae(NYSE:FNM) and Freddie Mac(NYSE:FRE). Thus, those modifying the loans don't bear the credit risk. As I showed earlier this week, officials in charge of this program have been quite eager to trumpet the volume of modifications in play, but data on the outcome of those modifications shows nothing short of what you'd expect from a program focusing on quantity over quality.

We all knew folly in financial markets would make a comeback someday. But so soon?